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China has been going through a period of historically unique economic growth
for more than 30 years. While a lot is known about the nature of the
institutional reforms which were put in place by Deng Xiaoping and his
successors, and which arguably triggered the expansion, the individual - or
microeconomic - side of Chinese economic takeoff remains rather poorly
understood.

Economic growth is not a product of abstract social forces, but results from
creative efforts of countless entrepreneurs - individuals who risk their money
and try to anticipate the best

ways to satisfy their customers. In order to shed some light on
entrepreneurship in China, the London-based Legatum Institute has performed the
first survey of Chinese entrepreneurs, asking more than 2,000 a wide range of
questions about entrepreneurship and the business environment in China, and
also about their motivations and the social dimensions of their work.

The survey provides an intriguing picture of the Chinese entrepreneurial class,
with potentially serious implications for Chinese economic development. On the
surface, Chinese entrepreneurs are optimistic about the future and confident
about the direction in which China is developing. Moreover, they display high
levels of social trust, with 72% saying that people can be trusted. The
conviction that hard work can get one ahead financially is also widespread,
with 66% of respondents adhering to this belief.

These findings give rise to a rather flattering picture of China. However, a
closer inspection of the survey results reveals some cracks in the foundations
of the country's economic growth. Firstly, corruption is a serious problem.
Nine out of 10 entrepreneurs identify corruption as an obstacle to
entrepreneurship and economic activity. Moreover, 69% of respondents claim that
corruption has got worse over the past few years.

Secondly, unlike their Indian counterparts, Chinese entrepreneurs display a
predominant reliance on formal, state-run mechanisms for the smooth functioning
of their businesses. For instance, instead of using family savings (20%) for
finance, Chinese entrepreneurs are primarily financed by traditional bank loans
(34%). Aspiring businessmen often mention that they are inspired to become
entrepreneurs by the pro-business policies of the government, while actual
entrepreneurs identify the formal education they received at school or
university as the main source of inspiration.

This is a stark contrast to the results of a similar survey conducted by the
Legatum Institute in India, where local entrepreneurs have highlighted a much
more important role played by family networks, family finance and by internal
motivating factors, as opposed to factors directly related to government
policies.

In principle, Chinese reliance on banks as their main sources of finance, on
formal education and on government pro-business policies could be a healthy
sign of a developed economy operating in a smooth-running institutional
setting. However, the fact remains that the Chinese banking sector and state
apparatus do not function as well as in economically advanced countries. This
said, the overreliance of Chinese businessmen and entrepreneurs on government
support and formal sources of finance might be a source of fragility,
especially in situations when Chinese banks run into trouble and when the
government's support of business is retracted.

The key difference between Chinese and Indian entrepreneurs, as captured by the
Legatum survey, is that Indian entrepreneurship has developed in an
institutional environment that was never particularly business-friendly. Indian
entrepreneurs have relied mostly on factors outside of government support
networks and formal banking systems to government support and formal banking
system, to get ahead with their businesses. The result is an organic and robust
entrepreneurial class, able to surmount negative institutional environments and
weak infrastructures in a period of economic uncertainty.

After 30 years of staggering economic expansion, led by export-oriented,
capital-intensive industries, China is overdue for an economic slowdown. Many
commentators have noted that China has a significant excess of industrial
capacity and has an undesirable real estate bubble, while its exports largely
rely on a sustained undervaluation of the Chinese currency.

The question thus arises as to how China's entrepreneurs will weather what
could be a major crisis, and how fast they will be able to adjust to an
environment in which they might not be able to rely on an insatiable world
demand for manufactured goods, government-provided investment incentives, and
easily accessible bank loans.

Dalibor Rohac is a research fellow at Legatum Institute. He holds an
MPhil from the University of Oxford, an MA from the George Mason University and
a doctorate from the Charles University in Prague.

(Copyright 2010, Dalibor Rohac.)

Speaking Freely is an Asia Times Online feature that allows guest writers to have
their say. Please
click hereif you are interested in contributing.